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No more bank bailouts

By Marcie Geffner · Bankrate.com
Saturday, April 27, 2013
Posted: 6 am ET

U.S. taxpayers will never again bail out any financial institution, not even one deemed to be "too big" to be allowed to fail.

That's according to prepared remarks delivered by Mary John Miller, under-secretary of the U.S. Treasury at a financial conference organized by the Levy Economics Institute of Bard College in New York recently.

Instead of bailouts, Miller says, "Shareholders of failed companies will be wiped out. Creditors will absorb losses. Culpable management will not be retained and may have their compensation clawed back, and any remaining costs associated with liquidating the company must be recovered from disposition of the company's assets and, if necessary, assessments on the financial sector."

Miller then moved on to explore the related issue of whether very large financial institutions benefit from lower costs to borrow money simply because they are so very big.

The proposition is that if creditors believe a company is so big or interconnected that the government won't allow it to fail, those creditors won't demand a higher return for lending money to that company. As a result, the company might enjoy an advantage of lower borrowing costs compared with other, smaller companies that don't benefit from that perception.

Whether lenders offer the largest bank holding companies more advantageous borrowing terms based on the belief that the government will bail them out if necessary isn't clear, Miller says.

Some of the evidence that supports this argument predates the financial crisis, so it's difficult to determine whether, and if so, to what extent, this sort of advantage still exists.

"The evidence on both sides … is mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too-big-to-fail subsidy," Miller says.

Moreover, the catchphrase "too big to fail" itself is subject to differing definitions.

"A common use of the too-big-to-fail shorthand is the notion that the government will bail a company out if it is in danger of collapse because its failure would otherwise have too great a negative impact on the financial system or the broader economy," Miller says. "With respect to this understanding of too big to fail, let me be very clear. It is wrong."

How do you feel about the concept of "too big to fail"? Are the big banks taking advantage of their size?

Follow me on Twitter: @marciegeff.

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Ralph S. Lewis
May 01, 2013 at 11:35 am

The size of any "banking enterprise" would not threaten the economy or the financial community if the "banking system" followed a common sense "community standard policy."

The results of a "first order of business" needs to prevent banks from transferring local deposits to investments outside the foot print of the local community. If a local community cannot support additional banks they should not be built.

In reality, the Federal Reserve needs to be Restructured and Reorganized as a means of conveying debits and credits as an electronic score board wherein the money supply available for barter is directly related to commerce (GDP) and not artificially expanded and contracted by political order...

Should this policy be adopted there would not exist a "too big to let fail" scenario.

Tom
April 27, 2013 at 6:22 am

Are credit unions safe from "confiscation" or are all financial institutions
insolvent?

Is a US bank rated "5 stars" subject to collapse?
How can we "trust" a bank's rating when there isn't a price banks can't fix,
ie.: LIBOR and now INTEREST RATE SWAPS?

Where should we store our money and in what currency or precious metal?